An econometric analysis of the foreign trade of Greece

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by

JOHN G. HALIKIAS

A Thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy of the

University of Warwick.

Department of Economics University of Warwick COVENTRY CV4 7AL

List of Tables

List of Figures

Acknowledgements

Declaration

Summary

TABLE OF CONTENTS

CHAPTER I

INTRODUCTION

1. Objectives of the Thesis 2. Structure of the Thesis

CHAPTER II

THE FOREIGN SECTOR OF THE GREEK ECONOMY

1. Trends of the Foreign Sector of Greece in the Period 1954-1976

2. Previous Studies of the Foreign Trade of Greece

2.1. Imports

2.2. Exports

CHAPTER III

GENERAL ISSUES IN MODELS OF FOREIGN TRADE

1. Import Demand Equations 2. Export Demand Equations

Page

7

12

13

14

15

16

19

21

31

31

36

39

CHAPTER IV

MODEL SELECTION PROCEDURES AND FORMULATION OF

GREECE'S IMPORT AND EXPORT DEMAND EQUATIONS 51

1. Model Selection Procedures 52

1.1. Starting from a Static Model 52

1.2. Starting from a General Unrestricted

Dynamic Model 58

1.3. Seasonality 67

1.4. Application of the Model Selection Procedures

to Monthly Data 72

1 .5. Computational Aspects 81

2. Formulation of Greece's Import and Export Demand

Equations

2.1. The Formulated Hypothesis

2.2. The Relevance of Least Squares

CHAPTER V

THE ESTIMATED IMPORT DEMAND EQUATIONS OF GREECE

1. Statistical Data

2. The Estimated Import Demand Equations of Greece

for Major Groups of Commodities

2.1. Import Demand Equations for Food (SITC:

Section 0)

2.2. Import Demand Equations for Crude Materials

(SITC: Section 2)

2.3. Import Demand Equations for Fuels (SITC:

Section 3)

87

87

92

101

106

106

11 3

2.4. Import Demand Equations for Chemicals

(SITC: Section 5)

2.5. Import Demand Equations for Manufactured

Goods (SITC: Section 6)

2.6. Import Demand Equations for Machinery and

Transport Equipment (Without Ships) (SITC:

Section 7)

2.7. Import Demand Equations for All Goods

(SITC: Sections 0-9)

3. Summary of Findings

CHAPTER VI

THE ESTIMATED EXPORT DEMAND EQUATIONS OF GREECE

1. Statistical Data

2. The Estimated Export Demand Equations of Greece

for Major Groups of Con~odities

2.1. Export Demand Equations for Food (SITC:

Section 0)

2.2. Export Demand Equations for Beverages and

Tobacco (SITC: Section 1)

2.3. Export Demand Equations for Raw Materials

(SITC: Section 2)

2.4. Export Demand Equations for Chemicals

(SITC: Section 5)

2.5. Export Demand Equations for Manufactured

Goods (SITC: Section 6)

Page

132

141

148

157

170

174

177

177

185

1 93

200

Page

2.6. Export Demand Equations for Total Merchandise

Exports (SITC: Sections 0-9) 216

3. Summary of Findings 227

CHAPTER VII

CONSIDERATIONS OF A JOINT ESTIMATION OF

THE IMPORT AND EXPORT DEMAND EQUATIONS

1. Residual Cross Correlation Functions of Import Demand Equations

2. Residual Cross Correlation Functions of Export

Demand Equations

CHAPTER VIII

APPLICATIONS OF THE EMPIRICAL FINDINGS

1. Ex-post Predictions for 1977 and 1978

2. Ex-ante Predictions for 1982

CHAPTER IX

CONCLUSIONS

1. Conclusions from the Application of the Model Selection Procedures

2. Implications for Trade Policies

APPENDIX: TIME SERIES

REFERENCES

230

232

244

253

261

272

282

290

LIST OF TABLES

CHAPTER II

1. Ratios Between Exports, Imports and Gross

National Income

2. Unit Value Index and Quantum Index of

Imports and Exports

3 •

4 •

5.

Percentage Distribution of Imports and

Exports

Balance of Payments

Cover of the Deficit of the Balance of Goods,

Services and Incomes (Percentage Distribution)

6. Level of Aggregation Adopted by Previous

Stu-7 •

1 •

1 .

2.

dies on Greek Import Demand Equations

Level of Aggregation Adopted by Previous

Stu-dies on Greek Export Demand Equations

CHAPTER IV

Process Time Required on the Burroughs 6700

CHAPTER V

Income and Price Elasticities for Six

Catego-ries of Imports and Total Imports

Import Demand Elasticities for Goods (Monthly

Data 1954-1976)

Page

22

24

26

28

30

33

37

85

168

1 •

2.

1 •

CHAPTER VI

Income and Price Elasticities for Five

Cate-gories of Exports and Total Exports

Export Demand Elasticities for Goods (Monthly

Data 1954-1976)

CHAPTER VII

contemporaneous Correlations Between the

Resi-duals of the Import Demand Equations

2. Correlation Coefficients Between Relative

Import Prices

3. Correlation Coefficients Between Relative

Export Prices

1 •

2.

CHAPTER VIII

Post Sample Parameter Stability Tests (1977

Monthly Data)

Actuals and Predicted Values of Greece's Imports

and Exports of Goods for 1977 and 1978

3. Post Sample Parameter Stability Tests (1977

and 1978 Annual Average Data)

4. Greece's Trade Balance in 1982, Assuming

Diffe-rent Combinations of Average Annual Growth Rates

Between 1976 and 1982 for Industrial Production

in Greece and OECD Countries

Page

225

228

242

243

250

254

257

260

5. Trade Balance of Greece in 1982 Under Diffe-rent Rates of Change in Relative Import and Export Prices and for 7% and 3.3% Rates of Growth of Industrial Production in Greece and DECD Countries Respectively

CHAPTER IX

1. Dynamics of the Preferred Specifications from the Application of the Model Selection Proce-dures

A.1 .

A.2.

A.3.

A.4.

A. 5.

A.6.

A. 7 •

APPENDIX

Index of Volume of Imported Food (SITe: Section 0) Index of Volume of Imported Raw Materials

(SITC: Section 2)

Index of Volume of Imported Fuels (SITC: Section 3)

Index of Volume of Imported Chemicals (SITC: Section 5)

Index of Volume of Imported Manufactures (SITC: Section 6)

Index of Volume of Imported Machinery and Transport Equipment (Without Ships) (SITC:

Section 7)

Index of Volume of Total Imports (SITC: Sections 0-9)

Page

269

274

291

292

293

294

295

296

A.8. A.9.

A.1 O.

A .11 •

A .12. A .13.

A .14 •

A.15. A .16.

A .17 •

A .18.

A. 19 .

A.20.

A. 21 •

A.22.

A.23.

A. 24 •

A.25.

A.26.

A. 27 .

Relative Import Prices of Food

Relative Import Prices of Raw Materials

Relative Import Prices of Fuels

Relative Import Prices of Chemicals

Relative Import Prices of Manufactures

Relative Import Prices of Machinery and

Transport Equipment (Without Ships)

Relative Import Prices of Total Imports

Index of Industrial Production of Greece

Index of Chemical Production of Greece

Index of Volume of Exported Food (SITC:

Section 0)

Index of Volume of Exported Beverages and

Tobacco (SITC: Section 1)

Index of Volume of Exported Raw Materials

(SITC: Section 2)

Index of Volume of Exported Chemicals

(SITC: Section 5)

Index of Volume of Exported Manufactures

(SITC: Section 6)

Index of Volume of Total F~ports (SITC:

Sections 0-9)

Relative Export Prices of Food

Relative Export Prices of Beverages and Tobacco

Relative Export Prices of Raw Materials

Relative Export Prices of Chemicals

Relative Export Prices of Manufactures

Page

A.28. Relative Prices of Total Exports 318

A.29. Index of Industrial Production of O.E.C.D. 319

A.30. Index of Industrial Production of Food,

Beverages and Tobacco of O.E.C.D. 320

A.31 . Index of Industrial Production of Chemicals

of O.E.C.D. 321

A.32. Index of Industrial Production of the

LIST OF FIGURES

CHAPTER VII

1 • Residual Cross Correlation Functions of

Import Demand Equations

2. Residual Cross Correlation Functions of

Export Demand Equations

Page

235

ACKNOWLEDGEMENTS

I wish to record my grateful thanks to Professor

Kenneth F. Wallis, under whose supervision this work was

carried out, for his constant encouragement and his

valu-able advice and criticism during its progress and

comple-tion. I am grateful to the General Directorate of

Inter-national Economic Relations, Technical Assistance Division,

of the Ministry of Coordination of Greece for their

finan-cial support. I also wish to thank the members of the

Com-puter Unit staff and in particular Dr. Rachel Countryman

and Mr. Gerry Sheridan for their help.

Finally I wish to thank my wife Mary for her

pati-ence and encouragement during the progress and completion

DECLARATION

The work contained in this thesis was the result of original research conducted by myself under the super-vision of Professor Kenneth F. Wallis and all sources of

information have been specifically acknowledged by means of references.

To my knowledge none of the work contained in this thesis has been previously submitted for examination.

SUMMARY

This study is mainly concerned with the estimation of Greece's dynamic import and export demand equations for goods over the period 1954-1976.

Some recent empirical studies of the foreign trade of va-rious countries are first presented and the approaches that have been pursued are described as a preliminary to the development of our own theoretical framework. Foreign trade elasticities are

then estimated to test various hypotheses in the theory of inter-national trade and, subsequently, to be used in the formulation of economic policy. Some applications of the empirical findings to the trade balance of Greece are attempted. In general the tra-de balance of Greece is found to be sensitive to both relative price changes and the growth rates of Greece and its trading partners.

In the course of the empirical work a number of methodo-logical pOints of importance in applied econometrics arise. In particular we are concerned with the empirical specification of dynamic models and the resulting hypothesis-testing problems. Two model selection procedures for the empirical specification of dynamic models are described and their performance is evalua-ted in the context of our large scale empirical study. The first procedure begins with the simplest (statiC) form of the relation-ship and tests are performed to determine whether i t is necessa-ry to consider more general specifications. An alternative me-thod begins with a general unrestricted dynamic model and then attempts to reduce the number of parameters needed to specify the data generation process. These two procedures are applied to every import and export demand equation we consider and the preferred specification to which each approach leads is reported.

It is found that the possibility of conflict between the two procedures increases as higher-order dynamic models are consi-dered.

CHAPTER I

INTRODUCTION

1. Objectives of the Thesis

International trade has always played a vital role in

a country's economic activity, and among the various branches

of economics is one for which extensive and detailed

statisti-cal information exists. Given also that quantitative

relation-ships between economic variables are invaluable tools in

eco-nomic policy, many investigators have analysed these data to

obtain import and export demand equations either for

descri-bing the responses of imports and exports to changes in prices

and the like, or for forecasting purposes.

The present study is mainly concerned with the

estima-tion of Greece's dynamic import and export demand equaestima-tions

for goods over the period 1954-1976. Foreign trade elasticities

have been estimated to test various hypotheses in the theory

of international trade and, subsequently, to be used in the

formulation of economic policy. This study has been motivated

by the lack of any dynamic model of the foreign trade of Greece,

in particular, and by any recent study of its foreign trade,

in general.

The present study is also concerned with a number of

methodological pOints of importance in applied econometrics ,

and though the particular application chosen is that of

estima-tion of import and export demand funcestima-tions, the pOints have a

empirical specification of dynamic models and the testing of

a series of hypotheses involved.

The lack of detailed information from economic theory

on the dynamic structure of economic relationships has caused

researchers to rely on empirical specification procedures for

model building with economic time series data. The

traditio-nal model selection procedure is to experiment with the

tech-niques suggested by the distributed lag literature and this

approach has been followed so far, at least as far as import

and export demand functions are concerned (see chapter III).

In this study we describe two alternative methods for

the empirical specification of dynamic models, and we try to

evaluate their performance in the context of our large scale

empirical study. In particular, these two procedures have been

applied for every import and export demand equation we consider

and the preferred specification to which each approach leads

is reported.

In the first procedure we start from the static form

of the relationship without assuming anything about dynamics.

Then, testing for serial correlation in the residuals enables

us to specify the dynQmic form of the relationship. This

appro-ach is based principally on the fact that misspecified dynamiCS

may result in a serially correlated disturbance and considers

tests which check this and allow us to discriminate between

stochastic specifications and dynamic specifications.

The above method is a stepwise approach which allows

us to extend the dynamic specification in a systematic way when

estima-ted, at any stage of the procedure, is inadequate. That is we

start with the simplest model and we test if i t is necessary

to consider a more general one. An alternative method is to

begin with a general unrestricted dynamic model and then

at-tempt to reduce the number of parameters needed to specify the

data generation process. Under this alternative we have a

main-tained hypothesis which is a general unrestricted dynamic

mo-del with the maximum number of lags for all variables, and tests

are carried out to ascertain whether restricted versions of i t

are consistent with the data.

The use of monthly data from the period 1954-1976 instea1

of annual or quarterly observations, which have been employed in

previous work on models of foreign trade, constitutes a novelty

of our approach. In the context of monthly data we describe the

application characteristics of the above empirical dynamic

spe-cification procedures.

Applying the above model selection procedures, the

pre-ferred specifications and their numerical estimates of the import

and export demand functions of Greece are obtained, and some

applications of these estimates to the trade balance of Greece

are attempted. Finally, we discuss the experience gained from

the application of the above model selection procedures, and we

deal briefly with the irnplications of the empirical findings for

2.

In chapter II, the main characteristics of the foreign

sector of the Greek Economy over the period 1954-1976 are

briefly outlined, and we discuss briefly previous research on

Greek imports and exports.

In chapter III, we present some recent empirical studies

of the foreign trade of various countries, describing in general

terms the approaches that have been pursued.

Chapter IV deals with the description of our model

se-lection procedures, their characteristics in relation to monthly

data as well as their computational aspects. Also, the basic

model we adopt for the Greek foreign trade which serves as a

baseline for our subsequent empirical analysis, is presented.

The presentation and discussion of the empirica'l

find-ings are contained in chapters V and VI. In chapter V an attempt

is made to obtain the preferred specifications and their

numeri-cal estimates of the import demand equations, while the

measure-ment of factors determining the foreign demand for Greek exports

is treated in chapter VI.

In chapter VII, we examine whether a jOint estimation of

the import and export demand equations could result in more

ef-ficient estimates. In particular, using residual cross

correla-tion funccorrela-tions, we examine if contemporaneous or lagged

corre-lations appear among the residuals of the various import and

export demand equations.

Chapter VIII is concerned with some applications of the

predictions are made for the country's trade balance under

dif-ferent growth rates in Greece and its trading partners, and

different relative price changes, showing at the same time the

sensitivity of the country's balance of trade to these various

assumptions.

Finally, in chapter IX we discuss the experience we

gained from the application of the above model selection

proce-dures, and we deal briefly with the implications of the

CHAPTER II

THE FOREIGN SECTOR OF THE GREEK ECONOMY

In section 1. of this chapter we describe the main characteristics of the foreign sector of the Greek economy over the period 1954 - 1976. In section 2. we discuss briefly previous research on Greek imports and exports.

1. Trends of the Foreign Sector of Greece in the Period 1954 - 1976

Greece, a small country with limited soil and subsoil resources, is highly dependent on international trade. This is mainly due to the country's present stage of development, the small size of the economy, and to the entire lack of fuels and some basic raw materials. The dependence of the country on the foreign trade increased slowly during the period 1954-1972 and more rapidly during the period 1973-1976. Thus, as i t can be seen from table 1, the ratio of the sum of imports and

exports to gross national income, increased from 0.252 in 1954 to 0.284 in 1972. But, during the period 1973-1976 the above ratio increased considerably and i t amounted to 0.425 in 1976. ?able 1 also shows that during the period 1954-1972 the export-income ratio did not vary significantly, while the corresponding import-income ratio increased from 0.172 in 1954 to 0.207 in

Conse-Imports Exports T ra e d B I G a ance ross N t ' a lona 1 Imports+Exports Imports Exports Exports

(c.i.f.) (f.o.b.) Income Income Income Income

1 954 9901 4556 5345 57467 0.252 0.172 0.080

1 958 16946 6953 9993 851 62 0.281 0.1 99 0.082

1 960 21 060 6096 - 14964 95174 0.285 0.221 0.064

1 965 3401 2 9833 - 24179 161 586 0.271 0.21 0 0.061

1 970 58750 1 9276 - 39474 263503 0.296 0.223 0.073

1 972 70373 261 25 - 44248 339554 0.284 0.207 0.077

1 973 1 02979 42ti12 - 601 67 441301 0.330 0.233 0.097

1 974 132181 60890 - 71 291 530081 0.364 0.249 0.11 5

1 975 172041 74441 - 97600 61 2388 0.402 0.281 0.1 21

1 976 221 B21 93~12 -128009 742436 0.425 0.299 0.126

Sources: National Statistical Service of Greece, Monthly Bulletin of External Trade Statistics; National Accounts of Greece, 194~ - 1975 and 1970 - 1976.

Imports 0.460 0.41 0 0.289 0.289 0.328 0.371 0.416 0.461 0.433 0.423

quently, the export-import ratio declined from 0.460 in 1954 to 0.371 in 1972 whereas i t increased to 0.423 in 1976.

With respect to the foreign trade of Greece, the post-war period can be divided in three periods. The first sub-period includes the years 1948-1952, when ummual conditions prevailed in the economy Of Greece. War damages (the civil war lasted until late 1949) and hyperinflation had severely dislo-cated the economic activity of the country, bringing its pro-duction to extremely low levels. At the same time severe import restrictions were imposed by the authorities to control the

large deficits in the balance of payments. In 1953 Greece de-valued its currency (drachma) by 50 percent in order to elimi-nate the fundamental disparities between domestic and interna-tional prices. Simultaneously, the authorities liberalized imports to put foreign trade on a sounder basis conducive to the economic development of the country. Since then, Greece has pursued a liberal import policy to the extend that only a small proportion of imports requires import licences. In view of the above discussion the period 1948-1953 has been excluded from our empirical analysis (see also chapter V, section 1.,

below) .

From 1954 to 1972, we have the second sub-period, during which, the gradual reinstatement of the monetary stability of

UNIT VALUE INDEX TERMS OF TRADE QUANTUM INDEX

1

Imports Exports Import? __ ~~_ ~ _ Exports

1954 9H.O 85.7 H7.4 21 .3 27.6

1958 96.4 96.7 1 00.3 35.1 37.3

1 960 93.1 86.5 92.9 35.6 36.6

1 965 94.7 98.2 1 03. 7 71 .4 52.0

1 970 1 00.0 1 00.0 1 00.0 1 00.0 1 00.0

1 972 11 2.6 1 04.1 92.5 1 22. 7 1 30.2

1 973 1 34.6 1 36.0 1 01 .0 1 54 .4 1 63.3

1 974 195.4 177.0 90.6 1 41 .0 1 79.3

1 975 233.1 1 96. (; 84.3 1 37 .7 1 95.7

1 976 259.8 215.5 82.9 14~.4 _225.9

1Excluding ships

Sources: National Statistical Service'of Greece, Annual Volumes of External Trade Statistics

Due to the relatively worldwide monetary stability

during the period 1954-1972, the unit value index of imports

increased at an average annual rate of 1.75 percent and the

unit value index of exports at an average rate of 2.46 percent.

From a quantity pOint of view, imports increased six times and

exports increased almost five times (table 2). In view of the

above events, the trade deficit of the country increased from

5,345 million drachmas in 1954 to 44,248 million drachmas in

1972, namely eight times more, whereas, as already mentioned,

the export-import ratio declined from 0.460 in 1954 to 0.371

in 1972 (table 1).

Over the same period, some noticeable structural changes

of the composition of the external trade of Greece, took place.

As can be seen from table 3, which shows the composition of

imports and exports according to the Standard International

Trade Classification (S.I.T.C.), the share of food and

manu-factures in total imports decreased, whereas the share of

imported machinery and transport equipment was doubled. With

respect to exports, the share of the traditionally exported

agricultural commodities (tobacco, raisins and oil) in total

exports, declined from 65.1% in 1954 to 18.0% in 1972. On the

contrary, the share of more dynamic agricultural products, such

as fresh fruit, vegetables and cotton, in total exports, incr~ed

from 8% in 1954 to 20% in 1972. A noticeable increase has been

also noticed in the participation of exported chemicals and

manufactures, whose shares in total exports increased from 3.4

and 5.8 percent respectively, in 1954 to 7.4 and 32.6 percent

O.

tobacco 0.2 0.2 0.1 0.2 42.8 37.1 17.5 16.0 8.2 8.6

2. Raw materials 14.9 12.7 10.6 9.5 9.0 8.5 15.7 25.2 16.9 14.1 8.8 10.0 3. Mineral fuels,

lubricants etc. 14.0 10.2 8.7 10.8 25.4 25.2 1 .0 1.211.0 5.8 4. Animal and

vege-table oils and fats 0.1 0.2 0.8 0.2 0.4 0.3 6.7 2.1 0.8 1 .5 1 .8 0.8 5. Chemicals 9.3 10.6 10.2 10.7 10.0 10.2 3.4 4.1 7.2 7.4 5.8 4.0 6. Manufactures 23.8 24.1 19.7 18.7 15.9 15.3 5.4 4 .1 28.6 26.4 28.7 31.7 7. Machinery and

trans-. t 1

port equlpmen 17.4 24.2 33.9 35.4 26.1 27.7 0.7 0.9 1 .5 2.2 3.9 4.9 8+9. Miscellaneous

ma-nufactureS 3.7 3.4 3.7 3.6 2.9 3.2 0.4 0.9 3.6 6.2 9.5 11.7 (0-9 ) TOTAL 100.0 100.0 1 00.0 1 00.0 1 00.0 1 00.0 1 00.0 100.0 1 00.0 100.0 100.0

1

Sources: Elaboration of External Trade Statistics of the National Statistical Service of Greece.

'"

agricultural products whose supply and quality depend on each

time -weather's conditions.

During the last period 1973-1976 the price increases

of the imported and exported commodities were very high (annual

rate of increase 24.5 percent and 16.6 percent respectively

-table 2) as a result of the considerable price increases of

crude oil and raw materials specifically, and more generally

because of the international and domestic inflationary

pressu-res. Moreover, the imported inflation was reinforced because

of the devaluation of the Greek currency (drachma) against the

U.S.A. dollar and the main currencies of Western Europe, which

took place in 1975.

In terms of quantity, imports increased initially in

1973, but then declined in 1974 and 1975 as a result of the

reduced economic activity caused by the Cyprus crisis during

that periodi finally increased again in 1976. On the contrary,

during the same period, exports increased at an average annual

rate of 11.4 percent, and though the trade deficit increased

more, the export-import ratio was slightly improved and i t

increased from 0.416 in 1973 to 0.423 in 1976.

The deficit of the balance of trade was covered for the

most part by the increasing receipts from sales of services

(tourism and shipping). In particular, during the period

1954-1972 the above receipts increased thirteen times, financing

about 27 percent of the merchandise imports in 1972, whereas

in 1954 they covered only 17 percent. These receipts increased

more during the period 1973-1976, but they were affected from

A' CURRENT TRANSACTIONS

1. EXPOrts _ goods (fob)

2. Less: Imports _ goods (cif) 1

I. Balance of trade

3. Sales of non-income services 4. ~Xpenditure of non-residents

Less:

5. Purchases of non-income services

6. Expenditure of residents abroad

II. balance of services

7. Income payments from the rest

of the world

8. Less: Income payments to the rest of the world

III. Net income fror,l the rest

of the world

IV. Balance of goods, services

and incomes (I + II + III)

V. Current transfers from the

rest of the world (net ba-lance)

VI. Balance of current transa-ctions (IV + V)

B' CAPITAL TRANSACTIONS

1. Capital transfers from the rest

of the world (net balance) 2. Net lending

TOTAL (1 + 2)

1

Excluding ships operating overseas

1954 4803 8541 -3738 375 1049 1450 465 - 491 975 102 873 -3356 1406 -1950 1739 211 1950 1

1958 ₁₉₆₀

I

7216 . ' 6242 9960 16092 15840 33113

-8876 -9598 -231$3

850 949 21&2 1914 2408 3980

586 823 1416

676 899 1947

1502 1635 ' 2799

1601 2213 4388

142 264 758

I

1459 1949 3630

-5915 -6014 -16724

2681

-3234

912 2322

3234

3006 ₆₂₄₁

-3001l -10483

1459 469 1549 10014

3008 1 0483

1970 1937!! 49262 -29884 3576 7034 2850 2884 4876 7777 2274 5503 -19505 10203 - 9302 54 9248 9302

Source: National Accounts of Greece, 1958 - 1975, and 1970 - 1976

1972 26203 67115 -40912 4876 13221 4452 4156 9489 13027 3450 9577 -21846 17126 - 4720 21 4699 4720 1974 62098 130724 -68626 8580 17187 8358 5613 11796 24744 6876 17868 -38962 20325 -18637 30 18607 18637 1975 74787 149447 -74660 12905 22123 24430 6685 3913 26761 7554 19207 -51540 23342 -28198 431 27767 28198 1976 93948 176869 -82921

1331 b

32275 28612 7553 9428 34906 9964 24942

-48551

27402

-21149

333

20816

had an unfavorable effect on tourism. Also, foreign exchange earnings from transportation were affected from the depression in the international transportation market, which occured

during the years 1975-1976. In view of the above, the receipts from sales of services financed only 19.7 percent of merchandi-se imports in 1974, 23.4 percent in 1975 and 25.8 percent in 1976.

Table 4 shows the balance of payments of Greece, during the period 1954-1976, according to the operating classification of National Accounts. As can be seen from the above table, the deficit of the balance of goods, services and incomes, increased

from 3,356 million drachmas in 1954 to 51,540 million drachmas in 1975, but decreased to 48,551 mil. dr. in 1976. Till 1951, the majority (about 90%) of the above deficit was covered by capital transfers (U.S.A. aid and reparations).

Since 1952 the U.S.A. aid was decreasing gradually and the deficit of the balance of goods, services and incomes was covered by the current transfers from the rest of the world

(mainly emigrant remittances and workers' earnings from Europe) and lending. Thus, the percentage of the above deficit which is covered by the current transfers increased from 6 percent in 1950 to 41.9 percent in 1954 and 52.3 percent in 1970. In 1975 i t declined to 44.2% since the increased unemployment in West Europe through its effect on the workers' earnings affected unfavorably the net balance of the current transfers. However,

the above ratio increased again to 56.4 percent in 1976 (table

5) •

TABLE 5

COVER OF THE DEFICIT OF THE BALANCE OF

GOODS, SERVICES AND INCOMES

(PERCENTAGE DISTRIBUTION)

1950 1954 1960 1970 1975 1976

1 . Current transfers from the rest of the world

(net balance) 6.0 41 .9 50.0 52.3 45.3 56.4

2. Capital transfers (U. S.A. aid -

repara-tions) 91 .5 51 .8 24.3 0.3 0.8 0.7

3 . Net lending 2.5 6.3 25.7 47.4 53.9 42.9

Deficit of the balance

of goods and services 100.0 100.0 100.0 100.0 100.0 100.0

Source: National Accounts of Greece

211 million drachmas in 1954 to 20,816 million drachmas in 1976,

covering in average the 47.8 percent of the deficit of the

ba-lance of goods, services and incomes, during the last four

2. Previous Studies of the Foreign Trade of Greece

Empirical studies of the foreign sector of the Greek

economy have been carried out by Suits (1965), Adelman and

Chenery (1966), Pavlopoulos (1966), Paraskevopoulos (1970),

Hitiris (1972)1, Sarantides (1973), and Prodromidis (1974).

These studies vary according to the sample period, the

secto-ral breakdown and the explanatory variables used. All of them

deal with the estimation of import demand equations, which we

discuss first, whereas little attention has been paid to exports

(Adelman and Chenery (1966), Paraskevopoulos (1970), Hitiris

(1972) and Prodromidis (1974».

2.1. Imports

Imports are regarded as the difference between two

va-riables, total consumption and domestic production, and the

import function is the difference between the functions

explain-ing these two variables, that -is.demand and suppLy functions.

This implies that the imported and home produced commodities

are identical. But, if an imported con~odity is not produced

at home, or the imported and home produced commodities are not

identical, the import demand coincides with the home demand for

that commodity. Therefore, due to the fact that the majority

of commodities imported into Greece are not produced at home,

all the above investigators formulate import demand equations

which simply express the coun~ry's home demand for such

commo-dities.

The above studies cover the following periods: Suits

(1953-1961), Adelman and Chenery (1950-1961), Pavlopoulos

(1949-1959), Paraskevopoulos (1954-1966), Hitiris (1955-1964),

Saran-tides (1953-1964) and Prodromidis (1961-1969). All the authors

estimate linear regression equations using annual data for the

periods we just mentioned. Paraskevopoulos estimates also double

logarithmic forms using quarterly data, whereas Hitiris (1972)

uses only quarterly data for the estimation of simple linear

form equations.

The level of aggregation at which these empirical

stu-dies have been carried out, varies from author to author, and

there is no sound explanation for that. However, the

availabi-lity of data at the time these studies were carried out

affec-ted the sectoral breakdown followed by each author. The

Natio-nal Statistical Service of Greece started the compilation of

foreign trade indices (quantum and unit value at the one-digit

SITC level of aggregation) at the end of 1956. They cover the

period 1951-1953 with annual data and the period 1954 onwards

with monthly and annual data, the first figures being available

by the end of 1958. Until then only quantities and values, in

current and constant prices, were provided by the National

Sta-tistical Service and the Ministry of Coordination (National

Accounts). This has also affected, as we shall see below, the

explanatory variables included in import demand equations. The

table below gives the major groups of commodities for which

Suits

(1953-l961)a

- Agricultural commodities (i) animal products and fish (ii) luxury agricultural

Adelman and Chenery

(1950-l96l)a

Foods, beverages and animal and vegetable oils

products (sugar, coffee, Crude materials

cocoa etc.) plus mineral fuels

(iii) plant products with domestically produced substitutes (cereal grains and other plant crops)

(tv) edible oils

- Manufacture s

a

(i) private consumer goods (ii) private non-consumer

goods •

Annual data bQuarterly data

and chemicals

- Manufactures

Pavlopoulos

(1949-l959)a

Hitiris - Paraskevopoulos

(1955-64)b (1954-66)a,

b

- Raw materi- - Foods (SITC 0) als

- Crude materials {SITC 2) - Consumption

goods - Fuels (SITC 3)

- Investment - Chemicals (.SITC 5) goods

- Manufactures (.SITC 6)

- Machinery and Transport equipment (SITC 7)

Sarantides

(1953-1964)a

- Foods

- Raw materials, fuel, and

intermediates

- Marufactures

- Construction materials (iron, steel, timber, copper etc.)

Except Suits, all the authors have also estimated

de-mand equations for total imports, whereas Paraskevopoulos has

also estimated import demand equations for individual

commodi-ties as well, such as meat, fish, dairy products, coffee,

co-coa, sugar, passenger cars, textile products without raw wool,

raw wool and services. Prodromidis (1974) examines import

according to the purposes of a sectoral planning model of the

Greek economy which is under preparation at the Athens Center

of Planning and Economic Research. He classifies the importable

cOmP.lodities in accordance with the input-output classification

system of Greece and not according to their use as is usual.

Even in this most recent one work the construction of new

se-ries of data is necessary and the study therefore covers only

the period 1961-19692.

According to the formulation of the Greek import demand

functions by the above investigators, the main explanatory

vari-ables which have been included in their equations are activity

variables and relative prices. As was mentioned before, unit

value indices are listed only for the S.I.T.C. groups of

commo-dities and therefore only Paraskevopoulos and Hitiris include

import prices in their disaggregated import demand equations,

deflated by the indices of domestic prices. In Suits' import

de-mand equations for manufactured consumer goods, animal products

and fish, and luxury agricultural products, the import prices

are implicit deflators obtained as the ratio of the current

lue of imports to value at constant prices. Adelman and Chenery

employ the same relative price of imports in all equations.

This is the price index of total imports divided by the GNP

de-flator. The rest of the authors use only income or activity

variables to explain the behaviour pattern of imports

(Pavlo-poulos (1966), Sarantides (1972».

The explanatory variables used to measure the economic

activity of Greece, differ from author to author depending upon

each investigator's classification. Income, in various forms,

has been included in all the models; i.e. disposable income,

GNP, net national income. In Greece quarterly figures for

inco-me are not listed and in both Paraskevopoulos' (1970) and

Hiti-ris' (1972) works the index of industrial production has been

chosen as an income-proxy. Value added by manufacturing

acti-vity has been employed as explanatory variable in import demand

equations for manufactured non-consumer goods, raw materials,

fuels a~d intermediates (Suits (1965), Pavlopoulos (1966) and

Sarantides (1972». Also, various forms of investment activity

and expenditure (gross fixed capital formation, investment in

housing, building and other construction, machinery, transport

equipment etc.) have been used to explain the imports of

invest-ment goods, construction materials, capital goods, and

machi-nery and transport equipment (Pavlopoulos (1966) and Sarantides

(1972».

Suits (1965) has also included in his import demand

equations for plant products and edible oils, the lagged stock

of cereals and the lagged stock of Oil, respectively, to take

Pavlopoulos (1966) has attempted to include in his equations

one-period lagged imports, but only for the import demand

function for consumption goods he obtained significant

re-sults.

2.2. Exports

Foreign demand functions for Greek exports have been

formulated in a way analogous to that used for the country's

import demand relationships, and have been expressed as functions

of world activity or income variables and the ratio of Greek

export prices to export prices of Greece's competitors.

However, few empirical studies have been carried out

on Greek exports because during the periods covered by the

abo-ve studies, Greek exporting activity was low and the major part

of exports consisted of a few agricultural products (Adelman and

Chenery (1966), Paraskevopoulos (1970), Hitiris (1972), and

Pro-dromidis (1974». The table below shows the groups of

commo-dities for which export demand equations have been estimated

by the above investigators.

In Adelman and Chenery's work each group of commodities

is expressed simply as a linear function of time.

Paraskevopou-los «1970), ch. 6) and Hitiris «1972), ch. 3) estimate linear

(and double logarithmic - Paraskevopoulos) regression equations

with annual data which refer to the periods 1951-1966 and

1954-1966 respectively. Their explanatory variables are, as mentioned

before, relative prices and economic or activity variables of

the areas of destination (volume of food consumption, cigarette

TABLE 7

LEVEL OF AGGREGATION ADOPTED BY PREVIOUS STUDIES ON GREEK

EXPORT DEMAND EQUATIONS

Adelman and Chenery (1966)

-Food, beverages &

tobaca:>, arrl animal & vegetable oils

Paraskevopoulos (1970) -Food

-Dried fruits (currants, raisins arx:1 dried figs) -crude materials, mine- -Tobacro

ral fuels

am

-Manufactured goods, arx:1 -cotton

machines arrl transpJrt -Non-a:>tton raw materials equipnent

-Services

-Manufactures arx:1 chani-cals

-Services

Hitiris (1972) -Food arx:1 live

ani-mals (SI'OC 0)

-Beverages arx:1

To-baca:> (srrc 1)

-Inedible crude ma-terials

(srrc

-<::hEmicals

(srrc

-Manufactures

(SI'OC 6)

GNP and population). They have also estimated export demand equa-tions for the total of Greek exports. Finally, Prodromidis (1974, ch. 5) estimates linear· and- double -logari thmic export ilemand

functions over the period 1961-1969 for groups of commodities according to the input-output classification system of the Greek economy.

pre-vails in the above studies based on the assumption that the de-mand for these commodities has a negligible effect on income or economic activity of Greece. Therefore they presume that the disturbances are independent of the explanatory variables and so least squares estimates are free of simultaneity bias. Over the periods covered by the above studies, the Greek economy was characterized by a rapid rate of growth. The result is a high intercorrelation among the various time series and most of the authors faced the problem of the deterioration of statistical significance of regression parameters when they attempted to include additional explanatory variables (Suits (1965), Pavlo-poulos (1966), Sarantides (1972) and Prodromidis (1974)).

Finally we note that all the estimated import and export demand equations are static in that all variables relate to a

single time period. The use of annual data and the relatively short sample periods may explain the absence of lagged variables and the problem of autocorrelation becomes less serious. Only in Hitiris (1972) and Sarantides (1972) do any equations exhi-bit serial correlation in the disturbances.

CHAPTER III

GENERAL ISSUES IN MODELS OF FOREIGN TRADE

In this chapter we briefly consider the main empiri-cal studies of the foreign sectors of various countries car-ried out during the last decade. Our intention is to discuss

the methodology adopted and the hypotheses selected for testing, elucidating any generalizations about these approaches that

emerge. For convenience we shall refer first to the estimated import demand equations and then to the export demand equa-tions (for a more extended survey see Stern at al (1976».

1. Import Demand Equations

usually in terms of activity variables, relative prices and

other variables reflecting each country's prevailing

condi-tions as we shall see.

However the concept of identical commodities is a

re-lative matter depending upon one's classification. Whether a

commodity is entirely foreign-produced or also the subject of

home production depends on the level of aggregation in the

commodity statistics. The empirical studies to which we refer

have been carried out at a level of aggregation which varies

from author to author. We note that Whitley (1977) classifies

U.K. imports into two major groups of commodities, namely

ma-nufactures and semi-mama-nufactures, whereas Kreinin (1973) works

at a disaggregate level of 56 groups of commodities for

U.s.

imports. In most of these studies a single aggregate import

demand equation is not estimated, but the elasticities of

to-tal imports with respect to income and prices are derived from

the elasticities of the disaggregated functions weighted by

the shares of each import category in total imports. Thus

aggre-gation bias may be reduced: see Barker (1970) for a detailed

analysis of its sources.

Economic theory offers little guidance on the

appro-priate functional form for lllport demand relationships and i t

rests upon each investigator to decide what form is more

con-venient for purposes of estimation. The linear import demand

function implies a constant marginal propensity to import and

declining elasticities with respect to the explanatory

varia-bles as imports increase, and has been adopted by a limited

Dutta (1964), Kwack (1972), Rhomberg and Boissonneault (1965)). On the other hand the majority of investigators adopt the

double-logarithmic form for import demand relationships which yields direct estinlates of the relative price and income ela-sticities and assumes constant elaela-sticities, which seems more _plausible. However, this specification constrains the import

demand elasticity with respect to import prices to be equal

in magnitude but opposite in sign to the elasticity with respect to domestic prices. In a test carried out by Murray and Ginman

(1976) with an aggregate import demand equation for Canada, the above specification was rejected.

The final form of the import demand equation to be estimated is developed in various ways. Most of the studies simply write down the relationship between actual import de-mand and its determinants according to the relevant

hypothe-sis. Import demand functions are also developed from the combi-nation of the relationship between long-run (or desired) de-mand for an imported con~odity and its determinants and a

The majority of the investigators use the traditional

single-equation methods to estimate import demand functions,

by regressing actual imports on explanatory variables, such

as import prices and domestic income. However, attempts have

also been made to develop equations which describe the

beha-viour of import supply and import prices. Turnovsky (1968)

builds a three-equation model determining import quantities

and prices. The first equation regresses import demand on

inco-me, relative prices, net overseas assets and the country's

exports. The second equation determines import supply in terms

of overseas assets, exports and a weighted activity variable

of the country's import-supplying countries (see p. 775), while

the third equation states the equality between import demand

and supply.

Ahluwalia and Hern~ndez-Cat~ (1975) give a system of

two equations in which the first expresses imports as a

func-tion of income and distributed lags of import and domestic

prices, while the second, following a profit-maximization

the-.ory, deter.mines the level of import prices in terms of

distri-buted lags of foreign market prices, exchange rates, domestic

prices and foreign capacity utilization variables. The latter

approach attempts to fill the existing gap in the literature

which traditionally treated import price as exogenous

varia-blesj that more attention should be paid to this had been

pOin-ted out by Prais (1962, p. 577).

Now we turn to discuss the explanatory variables which

have been used as determinants of import demand. Since the

demand equations, as mentioned above, import prices and dome-stic prices, usually in the form of relative prices, and do-mestic income or an activity variable have been included in

all the models. Moreover, some individual attempts have been made to include other variables which are expected to explain ·a sUbstantial part of the variation of imports: for example,

stocks have been included to take account of the dynamic ef-fects of past purchases (Kwack (1972), Rhomberg and Boisson-neault (1965), Whitley (1977), Hibberd (1977), Rees and Lay-ard (1971), and Hibberd and Wren-Lewis (1978».

Khan and Ross (1975) try to separate import demand

into its cyclical and secular components. They include in their import demand function, in addition to other explanatory va-riables, real domestic income and its trend level (defined as potential income) : a series of its values for a number of countries is provided by O.E.C.D. An analogous approach is adopted by Barker (1977) who includes as an explanatory vari-able in his import demand equation the ratio of the total de-mand of the commodity under consideration to the trend

compo-nent of the total demand.

Another explanatory variable which is used by investi-gators dealing with British imports, is a capacity utilization variable, expressed as a function of the proportion of manu-facturers working at full capacity (Barker (1976), W0itley

where a movement in imports cannot be accounted for in terms

of changes in activity or relative prices, but is the result

of changes in tastes, technology and the like (Barker (1976

and 1977), Dutta (1964), Hibb~id (1977), Rees and Layard (1971».

Only a small number of recent investigators adopt

sta-tic relationships in which all variables relate to a single

time period (Ball and Marwah (1962), Kwack (1972), Khan and

Ross (1975), Kreinin (1973». In these cases, where the

hypo-thesis to be tested is that consumers adjust themselves to

changed conditions within this single period, short-run and

long-run elasticities are assumed to be equal. But the

majori-ty of the models include lagged variables since i t is more

realistic to assume that the responses of imports to changes

in the explanatory variables can be delayed as purchasers

ta-ke time to readjust their spending patterns. Whenever

one-pe-riod lagged imports are included in the import demand equation

as predetermined variable, long-run (or equilibrium)

elastici-ties can also be derived_ (Turnovsky (1968), Dutta (1964),

Rhom-berg and Boissonneault (1965), Goldstein and Khan (1976),

Yad-av (1975), Whitley (1977), and Houthaker and Magee (1969».

Relative prices enter Barker's (1970, 1976, and 1977)

estimated import demand equations with a single period lag,

whereas in Price and Thornblade's (1972) model, relative

pri-ces follow a distributed lag pattern over two periods. Also

Almon distributed lags have been adopted to specify the time

shape of the reaction of demand to changes in relative prices

and activity variables (Aurikko (1975), Ahluwalia and

by ordinary least squares. Only Barker (1977) applied non-li-near least squares to take account of first order serial cor-relation in the disturbances; Whitley (1977) estimated his equa-tions by the instrumental variables method, treating the acti-vity variable and lagged imports as endogenous and using as

instruments current and lagged values of exports, public autho-"rities' fixed investment and current expenditure, lagged

rela-tive prices and the level of stocks lagged by two quarters.

2. Export Demand Equations

Exports have also attracted investigators' interest since the export sector plays a central role in a country's economy both in terms of generating employment and by provi-ding the means to pay for imports. The majority of the inve-stigators formulate export demand equations in a way analogous to that used for import demand relationships. Particularly

they develop export demand functions which determine exports in terms of world demand or activity variables, relative pri-ces and other specific variables which are expected to contri-bute to the explanation of each country's exports, as we shall see below. It should be mentioned, however, that the above fomrulation

assumes that there are no supply constraints and therefore what is speci-fied is an export demand equation.

decrea-sing elasticities as exports increase (Turnovsky (1968), Dut-ta (1964), Kwack (1972), Rhomberg and Boissonneault (1965».

Typically, a country's export volume is explained in terms of world demand, the country's competitiveness, the pro-fitability of exporting relative to selling at horne and the . pressure of internal and external demand. However, some

rese-archers follow an indirect way to define the final form of the export demand functions, taking into consideration other factors which may affect the determination of exports. For instance,

Hutton and Minford (1975) employ a mixture of demand and sup-ply functions in the description of export sales. They consider the specification of demand and supply schedules and the beha-viour of deliveries under conditions of disequilibrium between demand and supply. Supply influences enter their model in a constraining manner only when the demand for exportables from home and foreign buyers is greater than or equal to the avail-able capacity. They also argue that the structural parameters of the export demand equation vary according to whether there is world excess demand or supply of exportables and therefore they split their estimation period according to an index of capacity utilization and estimate separate equations for each. Batchelor (1977a) introduces an econometric model of export sales behaviour, the parameters of which vary with the level of internal demand pressure measured by capacity utilization. Also in another paper on U.K. exports (1977b) he develops a model to test whether the estimated elasticities are constant over the whole sample period or whether they have changed with

The competitiveness of a country's exports is a major

determinant and has been taken into consideration by all the

investigators. It is usually measured as the ratio of the

ex-port price to a weighted index of competitors' exex-port prices

(Kwack (1972), Rhomberg and Boissonneault (1965), Aurikko

(1975), Houthaker and Magee (1969), Hutton and Minford (1975),

Batchelor (1977a), Laury and Warburton (1977), Richardson

(1977». Richardson (1977) employs also the ratio of U.K. unit

manufacturing cost to competitors' unit manufacturing cost,

but due to lack of data he is confined only to the unit labour

cost. Also all the investigators have included in their models

a variable which measures the world demand for exports. This

variable is either a measure of world real income (Turnovsky

(1968), Kwack (1972), Houthaker and Magee (1969» or an

acti-vity variable which measures the world's production (Dutta

(1964), Winters (1976 and 1977» or world imports or exports

(Rhomberg and Boissonneault (1965), Aurikko (1975), Hutton and

Minford (1975), Ba~chelor (1977a and 1977b), Laury and

Warbur-ton (1977), Richardson (1977» usually in the form of a

weigh-ted index. Winters (1976 and 1977) uses also as a measure of

demand for the less developed countries their capacity to import

which is based on their availability of foreign exchange.

The profitability of exporting relative to selling at

home has been included in export demand equations only by two

authors, both dealing with U.K. exports (Winters (1976), Laury

and Warburton (1977» and is measured by the ratio of export

prices to domestic wholesale prices. The effect of the internal

investi-gators who analyse British exports, because they believe that

as home demand for a comnlodity rises, export supply is reduced.

Various variables have been used to measure the internal

pres-sure of demand, such as the domestic demand for exportables

(Hutton and Minford (1975}), the index of capacity utilisation

of manufacturing industry (Batchelor (1977a», the pressure on

capacity to produce which is measured by the ratio of production

output to its log-trend (Winters (1976 and 1977)}, the ratio

of home demand to its estimated trend level (Laury and

Warbur-ton (1977» and the index of export weighted capacity

utilisa-tion (Richardson (1977}).

In an analogous way few authors consider the effect of

external demand. In Hutton and Minford's model (1975) the

vari-able included for that reason is the world business cycle. This

is a weighted index of the log-deviations of the industrial

productions of the main industrial countries from their trend

levels. Batchelor (1977a) uses as a variable the proportion of

firms experiencing excess foreign demand, whereas Laury and

Warburton (1977) measure the external demand pressure using

the industrial production of the D.E.C.D. countries.

Finally, some researchers have included a time trend

in their models, since exports often exhibit trends that cannot

be explained by means of the above independent variables (Dutta

(1964), Hutton and Minford (1975), Winters (1976 and 1977».

The majority of the investigators analyse exports

ta-king export prices as exogenous variables. However some attempts

have been made, by authors who deal with U.K. exports, to

(Hutton and Minford (1975), Batchelor (1977a and 1977b),

Winters (1976». Export prices have been explained mainly as

a function of domestic prices and competitors' export prices.

The role of the home price is to measure the opportunity cost

of a unit of produce exported and also to measure the actual

cost of production (see Winters (1976), p. 133). The level of

competitors' export prices is included in the export price

equations for a reason analogous to that mentioned before in

relation with the export demand functions since in most cases

different exporters supply the same market. Also pressure on

productive capacity and home sales have been included in the

equations as a measure of domestic demand pressure to allow

for the effect on prices of economies or diseconomies of scale

(Batchelor (1977a), Wint~rs (1976».

Only a small number of recent investigators adopt

sta-tic relationships is which all variables relate to a single

time period (Dutta (1964), Kwack (1972), Houthaker and Magee

(1969), Winters (1976». Most authors develop dynamic

rela-tionships since i t is more realistic to assume that the

respon-ses of exports to changes in the explanatory variables can be

delayed as purchasers take time to readjust their spending

patterns and also because of the delay between the placing of

an order and delivery. The majority of the dynamic models use

the Almon distributed lag pattern to specify the time shape

of the reaction of the quantities exported to changes of

rela-tive prices, world activity and demand pressure variables

(Au-rikko (1975), Hutton and Minford (1975), Batchelor (1977a and

Most of the studies we refer to have been carried out

at a level of aggregation dealing mainly with the exports of

manufactures. Only Aurikko (1975) and Kwack (1972) work at a

disaggregated level of five groups of commodities for the

Swedish and U.S. exports respectively, whereas Winters (1976

and 1977) examines the export behaviour of sixteen commodity

groups of U.K. exports.

Finally, as in the case of import demand equations,

almost all the authors have estimated their models by ordinary

least squares. An exception is Turnovsky (1968), who employs

constrained least squares in order to incorporate non-linear

constraints on the coefficients of competitors' export prices

CHAPTER IV

MODEL SELECTION PROCEDURES AND FORMu~TION OF GREECE'S IMPORT AND EXPOR'r DEMAND EQUATIONS

As was mentioned in chapter II, Greece's import and ex-port demand functions considered previously were static relation-ships in which all variables relate to a single time period; that is, i t is assumed that consumers adjust to changed conditions wi-thin this single period. But in many cases, adjustment spreads over more than a single period and the demand function becomes a dynamic relationsllip, depending not only on the current level of its influences but on their past levels as well. Moreover, dyna-mic denland functions can be developed by including into the rela-tionship the effects of past purchases of the good unoer conside-ration.

However, we should notice that the neea to consider dyna-mic relationships does not depend only on the possible delay of the explanatory variables' effects, but also on the time aggrega-tion of the data used. For example, if a six-month lag effect is suspected, i t is difficult to detect i t with an annual model. On the contrary, data disaggregated over time may cause dynamic ef-fects, if the period between two successive observations is smal-ler than the time the effect of a variable takes to be demonstra-ted.

To test these hypotheses with observable data we must specify the time shape of the reaction of the quantity demanded, but on this economic theory has little to say and therefore a